New Law Journal | 30 September 2011 | www.newlawjournal.co.uk
SPECIALIST LEGAL UPDATE 1325
Negligence
Reversal of fortune
Alison Padfield explains why legal
clarity & coherence trumped fairness
in Scullion
In Brief
zzApplication of Smith v Eric S Bush to buy-to-let transactions.
zzPotential impact of “gifted deposit” on purchaser’s claim.
T
he Court of Appeal has decided
that a surveyor engaged to
provide a valuation of a buy-tolet property for a lender does not owe
a duty of care in tort to the purchaser
(Scullion v Bank of Scotland plc (trading
as Colleys) [2011] EWCA Civ 693 [2011]
All ER (D) 126 (Jun)). Resisting the
temptation to allow a hard case to
make bad law, Lord Neuberger MR
(giving the only reasoned judgment)
reversed the decision of the judge
below, even though it appeared, as he
said, that the purchaser had been taken
advantage of by a property development
company, had been misled badly by
his conveyancing solicitors, had been
innocently involved in a mortgage
scam orchestrated by a number of
people, and had been misinformed by
the valuer. As a result, the purchaser
bought the flat which was the subject
of the proceedings, and lost a “not
insignificant” amount of money.
The claimant, Mr Scullion, started
his working life as a plasterer, became
a jobbing builder, and then took over
a small property management and
maintenance company. When he reached
50, he decided to invest in the residential
buy-to-let property market using some
of the money which he had accumulated
in his private pension fund. Scullion
entered into an agreement with Portfolios
of Distinction which, in return for a fee
of £25,000, promised to find him, within
a year, a portfolio of properties worth
£1m which he could acquire for minimal
capital outlay.
The legacy of Smith v Eric S Bush
It is now over 20 years since the decision
of the House of Lords in Smith v Eric S
Bush [1990] 1 AC 831. Here a surveyor
engaged by a mortgage lender to value
“a modest house at the lower end of
the property market” was held to owe
a duty of care in tort to the purchaser.
At that stage, the position in relation to
expensive houses or commercial property
was expressly reserved. The buy-to-let
market did not exist, and there was
no reference therefore to the situation
which arose in Scullion—the purchase
of buy-to-let property on a small scale
for investment purposes by private
individuals who earn their living by
other means.
In Smith, the evidence established
that Mrs Smith was buying a home; that,
in relying on the surveyor’s report for the
lender rather than obtaining her own,
she was “behaving in the same way as
the vast majority of purchasers of modest
houses” and—crucially, in terms of the
imposition of the duty of care—that
all of this was known or should have
been known to the surveyor who valued
the house. In Scullion, no evidence was
led on this last point eg, as to what a
normally well-informed valuer would
have known, or what normal practice
was among buy-to-let purchasers as to
the obtaining of valuations. The judge
nonetheless held that the reasoning in
Smith should apply, effectively taking
the evidence from Smith and transposing
it to the rather different context of a
modern buy-to-let transaction.
A different context
For the master of the rolls, this
change of context was crucial. He
distinguished Smith on four grounds,
all of which stemmed from the fact that
the transaction which the lender was
proposing to fund, as the valuer knew
(not least because it was stated in terms
at the top of the lender’s report pro
forma), was the purchase of a residential
unit, not as the purchaser’s residence,
but for the purpose of an investment.
As Lord Neuberger said: “This was not a
case, such as those considered in [Smith v
Eric S Bush], which involved ‘an ordinary
domestic householder purchasing his
home’ as it was put by Henry LJ in
Omega Trust Ltd v Wright Son & Pepper
[1997] 1 EGLR 120.”
The four grounds which Lord
Neuberger considered to be the points of
distinction were:
zzFirst, that from Scullion’s point of
view, the purchase was “essentially
commercial in nature”.
zzSecond, there was no evidence to
support the proposition that anything
like the same high proportion of those
people who bought to let in 2002 (the
date of Scullion’s purchase) relied only
on valuations prepared by a valuer
instructed by their lender, rather than
obtaining their own valuation.
zzThird, as any valuer would appreciate,
a purchaser buying a property to let is
at least as interested in its rental value
as in its capital value.
zzFourth, and by way of contrast,
where a property is being bought
to let, a valuer instructed by the
prospective lender would appreciate
that his client is primarily interested
in the property’s capital value, as the
security for the loan.
On this basis, the master of the rolls
concluded that there was no inherent
likelihood that a purchaser, buying
the flat purchased by Scullion for the
purpose of letting it out, would rely on a
valuation provided to the lender. He said
that, unlike in Smith, there was simply
no evidence to suggest that (using the
expressions of Lord Bridge and Lord
Oliver in Caparo Industries plc v Dickman
[1990] 2 AC 605) there was “a high degree
1326 LEGAL UPDATE SPECIALIST
of probability”, let alone that there was
an “overwhelming probability”, or that it
was “very likely” or “almost certain” that
a purchaser such as Scullion would be
expected to rely on the lender’s valuation,
rather than obtaining his own valuation
advice on the rental and capital values of
the flat.
Several other potential points of
distinction were argued but rejected.
These included the low fee (£35) paid by
the lender for the valuation in Scullion.
This was held not to be significant
because the fee, whatever its level, was
the sum which the valuer was prepared to
accept for proving the report. Similarly,
although inclined to accept that the
flat purchased by Scullion was a more
valuable property than those considered
in Smith, Lord Neuberger was not
persuaded that the difference was of great
magnitude, and therefore of any real
relevance.
“Gifted deposits”
In June 2011, the Financial Services
Authority (FSA) published a report
entitled Mortgage fraud against lenders.
It noted that, in the years leading up to
www.newlawjournal.co.uk | 30 September 2011 | New Law Journal
2007, some lenders suffered substantial
losses as a result of mortgages being
secured under false pretences, with
Bradford & Bingley plc and the Chelsea
Building Society being two prominent
victims. Interestingly, the FSA also said
that mortgage fraud has remained “a
resilient phenomenon” despite falls in
lending following the financial crisis.
Against this background, although the
first instance judgment was overturned
on the issue of duty of care, it remains
of interest because of the judge’s obiter
ruling (which was not appealed) on the
legal impact of a so-called “gifted deposit”.
In the Scullion case, the contract of sale
provided for a “gifted deposit” of 15%
of the purchase price. As the master of
the rolls said: “This mysterious provision
betrays the fact that the transaction
appears to have been part of a regrettably
familiar form of mortgage fraud.”
This type of mortgage fraud essentially
involves a representation to the lender
that the purchase price is higher than
it really is. This results in the lender
unwittingly making a loan at a higher
loan to value (LTV) ratio than it
otherwise would —sometimes more than
100% of the purchase price—while the
purchaser is able to finance the purchase
without any capital contribution. In the
Scullion case, the “ostensible purchase
price” was £352,950, but the total
consideration paid for the flat was “in
reality” £300,007.
The judge at first instance said that
Scullion’s application to the lender was
inextricably linked to his claim against
the surveyor, and although he acquitted
him of involvement in any wrongdoing,
he said that if he had found that Scullion
had deliberately misled the lender
into making the loan by fraudulently
overstating the purchase price, the
principle of ex turpi causa (that no court
will lend its aid to someone who founds
an action on an immoral or illegal act)
would have debarred him from pursuing
his claim against the surveyor. The
same reasoning would apply to a claim
against a solicitor involved in a buy-to-let
NLJ
transaction. Alison Padfield, barrister, Devereux
Chambers. E-mail: padfield@devchambers.
co.uk Website: www.devereuxchambers.co.uk
Twitter: @alisonpadfield